State Of The Economy

Transcript

LEIGH SALES, PRESENTER: Another day, another plan to fix the European debt crisis and pull the world back from the brink of recession. Over the weekend, world leaders devised a scheme to try to deal with the problems. It involves a managed Greek default, bank rescues and more money for bailouts. But it's all pretty vague and not without risk, as Stephen Long reports.

STEPHEN LONG, REPORTER: The Pope's visit to his birthplace, Germany, provided Europe with a welcome distraction from the problems in the material realm: the $4 trillion wiped off share markets last week; the fears and forecasts of financial Armageddon.

MARK FABER, GLOOMBOOMDOOM REPORTER (Sept. 22): The best is that we prepare because we're all doomed! We're all doomed!

STEPHEN LONG: While investors prayed for a miracle, across the Atlantic in Washington, the world's Finance ministers and central bank governors cooked up their latest new plan, though some think it's far from divine.

OLIVER HARTWICH, CENTRE FOR INDEPENDENT STUDIES: What it risks is of course creating hyperinflation because you can imagine what happens when you flood a economy, even if it's a big economy like the eurozone, with potentially trillions of euros. They're just asking for hyperinflation.

STEPHEN LONG: US Treasury boss Tim Geithner was apparently the brainchild of the new plan to rescue Europe from debt disaster and save the world from recession.

As the debt clock ticks down, the plan aims to rescue banks and reassure the world that big countries like Italy and Spain won't go broke. It essentially involves throwing even more money at the problem, up to two trillion euros, equivalent to 2.8 trillion Aussie dollars. But there's a bit of smoke and mirrors involved. The existing bailout device is the European Financial Stability Facility, the EFSF. It's only got maximum 700 billion euros, which isn't nearly enough. So world leaders are planning to do what's known as leveraging the fund, a bit like buying shares with a margin loan.

OLIVER HARTWICH: There are plans that the European Stability Facility will actually purchase government bonds, deposit them straight with the European Central Bank, get fresh money from the central bank and use that money to buy even more government bonds. And so they are creating a perpetual motion machine whereby the European Stability Facility and the European Central Bank will effectively just print money on an endless scale.

FARIBORZ MOSHIRIAN, UNSW: I think the European leaders have to distinguish between the role of European Central Bank, which has got responsibility for interest rate and price of stability, not acting as the Eurozone Treasury, as opposed to this new fund which is - eventually is going to act as Eurozone Treasury.

STEPHEN LONG: Tens of billions of dollars are being set aside to recapitalise banks exposed to government debt default and other losses. A managed default of Greece's national debt now appears to be part of the plan.

ROBERT RENNIE, WESTPAC: We've get two choices here. Greece can default in an organised fashioned or it can default in a disorganised, riot-style fashion.

STEPHEN LONG: But not a Greek exit from the euro.

OLIVER HARTWICH: Angela Merkel appeared on Germany's top-rating political talk show this morning for a whole hour. She was asking questions about the Eurozone and the future of the euro. And what Angela Merkel specifically ruled out was a return to the Deutschmark and she specifically also ruled out a Greek exit from the eurozone.

FARIBORZ MOSHIRIAN: The problem we facing in Europe is no longer debt crisis, it is leadership crisis, simply because we are looking at eurozone where we are at the mercy of national leaders to act for the interests of Europe. And I think at this stage, unless national leaders act for the interests of Europe as a whole, we are going to see constant volatility and uncertainty in the market.

STEPHEN LONG: The Australian dollar's wild ride is one part of that volatility.

ROBERT RENNIE: If you look back over the last - well, all the way back to the float from 1983 to 2007, the average range that we would see in any given year would be about 11 points. So the range that we've seen in the last three weeks is equivalent to what we would see in a normal year, at least pre-GFC. So intense volatility, and importantly, it's being driven by non-Australian events.

STEPHEN LONG: For Australian exporters, the fall in the Aussie dollar to below parity might provide some relief if it continues.

FARIBORZ MOSHIRIAN: Australia will be better off if we have a slower economic activities in China. Around eight per cent economic growth in China will make sure that Australian dollar is not going to go above parity and manufacturing sector will remain more competitive, our tourist industry will operate more effectively.

STEPHEN LONG: But if China's export markets dry up as the Eurozone crisis spins out of control, Australian businesses might yearn for the days when a high currency was the biggest worry.

LEIGH SALES: And tomorrow night I'll be talking to the US managing editor of the Financial Times Gillian Tett about whether we can avoid a global recession or not.